The Sequence of Events

By mid-January of 2009, one federal agency - the Financial Industry Regulatory Authority - was beginning to believe Madoff's firm may not have transacted any trades at all. FINRA said there was no record of Madoff's investment funds placing trades through his brokerage operation. That left only two options - either he had been placing trades only through other firms - which would be highly unusual - or he was not placing any trades.[1]

Madoff's firm was the 23rd-largest market maker on Nasdaq in October of 2008, handling a daily average of about 50 million shares, according to exchange data. The firm specialized in orders from online brokers in some of the largest U.S. companies, including General Electric Co. and Citigroup Inc.[2]

According to the U.S. Attorney's criminal complaint against him, Madoff told senior employees of his firm that it was "basically, a giant Ponzi scheme," with estimated investor losses of about $50 billion. The size of the alleged loss would make the firm one of the biggest frauds in history, close behind Enron's loss of $63.4 billion in assets when it filed for bankruptcy in 2001.[3]

The hedge fund, Fairfield Sentry Ltd., was run by Madoff Investment Services to invest in shares in the S&P 100. The fund claimed to be up 5.6 percent through the end of November, when the Standard & Poor's 500-stock index was down 37.65 percent. In October, Fairfield Sentry was said to be down 0.06 percent, a month when the S&P 500 lost 16.8 percent. Since it started up in December 1990, the fund averaged a 10.5 percent annual return, according to fund documents. These unusual returns sparked widespread skepticism for years on Wall Street, and some traders suggested his firm could be engaged in front-running. Madoff told Barron's in 2001 that charges of front-running were "ridiculous."[7]

Regulators said Madoff may have avoided scrutiny in part because he simultaneously operated a legitimate, regulated and high-profile business as a middleman for the buyers and sellers of stock. In that role, he helped to create Nasdaq and advised the SEC on electronic trading issues.[9]

Madoff's investment prowess did raise suspicions in some quarters; whether the markets were up, or down, Madoff managed steady gains of 12 percent or so a year, reportedly achieving that by trading a mix of stocks and stock-index options.[10]

In early February of 2009, a Spanish law firm that filed a U.S. lawsuit in the name of some of Madoff's victims said that there were up to three million "direct and indirect" victims worldwide of the alleged fraud. The estimate was said to be based on information collected from over 30 law firms around the world that were representing the victims of the alleged scheme in 25 countries.[11]

On Apr. 28, 2009, Madoff's market-making business was sold at an auction to Castor Pollux Securities LLC for up to $25.5 million, a fraction of what is was previously believed to be worth.[13]

On June 29, 2009, Madoff was sentenced to 150 years in prison. The judge said the fraud Madoff committed was so extensive that the judge needed to send a symbolic message to those who might imitate his fraud and to victims who needed relief.[14]

Background

Madoff founded his business in 1960 with $5,000 he earned in part by working as a lifeguard on Long Island.[15]

The SEC tapped his expertise in the past, naming him to a 25-member advisory committee on market structure in 2000 and frequently calling on him to be a commentator at agency round-table discussions. His name was even applied informally to an SEC rule: The "Madoff exception" allowed market makers such as Madoff to sell stock short to facilitate a customer buy order, even if the stock in question was ticking downward. Short sales on a downward-ticking stock were prohibited at the time.[16]